Sunday, July 26, 2009

Dubai's troubled finances

Finsbury was initially brought in by Nasser al-Shaikh, the then head of Dubai's Department of Finance. He was replaced as its director general in May by Abdulrahman al Saleh in circumstances that remain unexplained....Market participants were, however, keen to stress the difficulty of the role Finsbury had taken on - pointing to a lack of coherent reporting lines and a lack of direction from the client. 'Dubai doesn't know what it wants. It wants nice press, but has no idea how to get there,' one Middle East PR professional said.

"The crisis is affecting business concerns about the sustainability of Dubai, especially where it comes to the honouring of contracts," says Elizabeth Stephens, risk analyst with insurance broker Jardine Lloyd Thompson.

A debt meltdown was averted in February by the federal government's $10bn soft loan, part of Dubai's $20bn bond programme.

Strong federal support for all UAE banks has underpinned Dubai's financial strength, from direct deposits to last month's guarantee for bank bonds, allowing them to raise money more easily. Half the $10bn loan was used by state-backed developers to pay contractors. Some have been paid fully and others partly, others as yet not at all.

Receipt of the second $10bn tranche of federal bail-out cash money should be a formality, so long as the government can convince the federal authorities that it is tempering its former exuberance....The legal and regulatory infrastructure, set up in an oil boom, is inadequate for rising redundancies, insolvencies, and a real estate market in collapse.

Lawyers have been kept busy with a steady flow of debt recovery work, says Chris Mills of Clyde & Co, while also dealing with disputes between developers and contractors as investors try to exit agreements amid 50 per cent price falls....[A] sense of drift since the federal bail-out loan in February has worsened since the public defenestration of de facto finance minister Nasser al Shaikh, one of the few officials prepared to take tough decisions.

“Nobody really knows what any of the statistics are,” says a Western analyst. “We haven’t seen the half of it yet,” says a Western banker, referring to the debt and the possible defaults. It is notable that almost nobody in business or government is prepared to talk publicly. Cohorts of public-relations people surround the bigwigs and shield them from scrutiny....Some foreign building and dredging companies have not been paid for months, and some Dubai companies are offering to pay them only partially....Earlier this year a leading Dubai figure said that the statelet’s consolidated debt was around $80 billion, but no one has issued a detailed breakdown of accounts; only a minority of Dubai companies are listed. Others say that the true sum of debt may be closer to $120 billion.

In February Dubai’s department of finance issued the first $10 billion chunk of a bond totalling $20 billion to help stave off the creditors, open new lines of credit and reschedule debt. Now, at a time when international banks are still loth to lend, it has been reported that the second chunk will be guaranteed by the UAE’s government. More may still be needed.

It is not clear who is in charge—apart from Sheikh Mohammed bin Rashid al-Maktoum, Dubai’s ruler (pictured above), whose big interest is racehorses. He appointed a respected local man, Nasser al-Shaikh, to take over the department of finance and sort out the crisis. It was reckoned that, for a start, he would be empowered to identify the size of the debt, both commercial and government (often one and the same) and the extent of Dubai’s toxic assets. But in May he was summarily and mysteriously sacked. Some think he was blocked from looking too closely into the accounts at Nakheel, among other firms. Otherwise the old-guard management of Dubai—and the UAE—is still pretty intact. No one has been held responsible.

Mr Sheikh's original appointment came at the moment when Dubai's real estate-driven economic boom was coming to an abrupt halt. He was closely involved in efforts to clarify the level of indebtedness of the Dubai government and its corporate affiliates and in raising funds to cover these debts. In February, Mr Sheikh's department announced the launch of a US$20bn bond programme, to which the Central Bank of the UAE subscribed to the entirety of the US$10bn first tranche. Mr Sheikh indicated that he would in due course announce details of how these funds had been allocated, but this information has not yet been forthcoming. In the meantime, contractors have been complaining with increasing anxiety about the failure of Dubai developers to pay their bills.

In trying to unpick the tangle of Dubai's corporate liabilities Mr Sheikh ran the risk of offending some of the powerful protégés of the ruler who built up formidable business empires during the boom years. In an apparent effort to deflect criticism, he appointed the Rothschild investment bank to advise the government on managing the support fund. Another sensitive issue was Mr Sheikh's stated intention to consolidate some of these corporations.

Just before his dismissal, Mr Sheikh had spoken at length about Dubai's debt management plans at a World Economic Forum meeting in Jordan. He said that he planned to establish the corporate support fund as a separate legal entity, and that the government would soon raise the second US$10bn tranche in its bond programme, indicating that a number of international sovereign wealth funds had expressed interest in subscribing.

As one of the new breed of technocrats in Dubai, Mr. Shaikh had grasped the need for greater transparency to gain the confidence of international investors. Unlike many of his peers, he was comfortable discussing Dubai's challenges in restructuring its $80 billion debt pile.

The fear is that he has paid the price for his openness, which appears to have created enemies within Dubai's inner sanctum of government officials.

Last month it was announced that Rothschild’s Dubai office had been retained by the Government’s Department of Finance to advise on the US$10 billion (Dh36.7bn) financial support fund (FSF) raised by Dubai on the bond markets (with a further $10bn in the pipeline)....A key qualification for FSF eligibility, as explained on Saturday by Mr al Shaikh to the media at the World Economic Forum in Jordan, is this: recipients will be those government-related corporations that are regarded as essential for the long-term future development of Dubai’s economy. In practical terms, this is likely to boil down to a fairly short list of business sectors – infrastructure, transportation – including the Metro and Maktoum airport projects – aviation, ports and shipping. Tourism is also said to be included on the list, as a key component of Dubai’s role as a global hub.